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4/30 - 6.0% , where y; is the vicld - to - maturity on a j-year strip . Assume that all cash flows are riskless
4/30 - 6.0% , where y; is the vicld - to - maturity on a j-year strip . Assume that all cash flows are riskless and we can borrow and land at the stated rates . You buy 50, 000 30 - year strips and partially finance these by issuing 5 , 000 2- year strips ( i.C., you are borrowing money by promising to pay $500 , 000 - 5, 000 x $100 in two years ) . ( a ) How much of Lemon County's money are you investing ( i.C., what is the not investment ) ?" ( b ) Suppose that one second after you make the above investments , the Federal Re- serve Board announces that it is taking steps to raise interest rates . Assume that the yields on all of the strips immediately increase by one percentage point ( i .C .. 4/1 = 1/0. 42 - 5%, 429 - 7.1%, and 9/30 - 7.0% ). By how much ( in dollars and in percentage terms ) does the value of the county's investment change due to the unexpected announcement !" ( C ) After the announcement , what are the forward rates of interest $2 and $30
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